The audit report on Exxon’s post-contract costs (Part II)

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In last week’s article, we began a discussion of the audit report on Exxon’s post-contract costs covering the period 2018-2020. We stated despite our decades of experience writing audit and other reports as well as reviewing drafts reports, we found it extremely difficult going through the report to identify the findings and recommendations contained therein. Specifically, the report lacked basic structure. There is no table of contents to guide readers through the report; no executive summary; no list of abbreviations; no definition of the technical terms used; and no sections dealing with the terms of reference for the assignment, the scope and methodology used, the auditing standards that were followed in the conduct of the audit, and findings, conclusions, and recommendations, among others. The auditors’ overall conclusion was that the amount shown as recoverable costs were in accordance with the 2016 Petroleum Sharing Agreement (PSA), except for items discussed in the report. However, as indicated in last week’s article, not enough audit work was undertaken to enable the auditors to draw this conclusion. A substantial amount of audit fieldwork also appeared to have been carried out by junior auditors. In today’s article, we discuss the contents of Appendix B of the report. This appendix, comprising 13 pages out of the 55-page report, sets out the auditors’ response to 30 sets of questions posed by the Government. The auditors stated that the response, compiled during their fieldwork, was specifically for the or or outside parties. The contents are essentially not audit findings and should have been dealt with in a separate confidential report to the Government. Be that as it may, we now examine the responses to the questions posed by the Government. Information on licence data set and time-writing The auditors stated that they did not request information on license data set because the Cost Recovery Statement did not contain any transactions associated with a license data set. They also stated that EEPGL argued that the information was outside the scope of the audit. The auditors suggested that Government could obtain such information directly from EEPGL As regards time writing, Exxon’s affiliated employees time wrote to specific Stabroek cost objects, including geological and geophysical cost objects. The Joint Audit Data Exchange (JADE) included amounts charged and employee names were coded to these cost objects. Time writing for outside of the Stabroek Block EEPLG has an exploration departmental cost object for allocating costs based on the time writing of the lead geologist. The allocation includes Suriname and the other Guyana Blocks. Any time spent by Exxon’s affiliated employees that time wrote directly to Suriname was not be included in the auditors assessment, as it was not charged to the Stabroek Block. EEPLG explained that Suriname geological work was almost 100 percent performed in its Houston Texas office, with only minor work done in Guyana. Regarding the specific licence data set that the geological and geophysical team had, this information was not made available as it was outside the scope of the audit. All geological and geophysical costs were supported by timesheets or similar documents and were charged to specific projects. Only costs charged to the Stabroek Block fell within the scope of the audit. Affiliate office costs Individuals working in the Contractor’s Guyana offices performed services for all of Guyana operations. The Contractor allocates monthly office operating expenses but charges 100 percent of office capital costs to the Stabroek Block as discussed at Appendix A of the report. Employees’ costs, including those of EEPGL employees or expatriates, were allocated between the Guyana Blocks, including Canje and Kaieteur, based on work study metrics. Payara exploration and possibility of “double dipping” The Payara 2 well was to include exploration of the Pacuma prospect. The auditors noted that approximately US$1.9 million was charged to the prospect in four cost objects but did not identify any duplication of costs. Post well studies The auditors stated that: (i) while they identified various studies for the Stabroek Block, such as environmental studies, they did not find any well-specific costs for post-well studies; and (ii) if the studies were done by EEPGL or affiliate personnels, they would not know the costs for any post-well studies because there was no documentation attached to time writing data. Cost of treating and over boarding produced water According to the auditors, this information was not available in the audit documentation. It is unclear why this was not so, considering that such documentation was prepared by the auditors. That apart, the auditors stated that they saw no evidence of specifically identified operating costs for the Floating Production Storage and Offloading (FPSO) because the vessel was leased, and the services were billed in large sums on one or two monthly invoices. It is unclear why requests were not made for a detailed breakdown of the invoices. Additionally, the Contractor was required to conduct a cost-benefit analysis of injecting produced water as against treating and over-boarding it for the Payara development, as required by the Environmental Protection Agency (EPA). The auditors, however, indicated that they did not have any information about whether this study was undertaken and what were the results. However, a simple check with the EPA could have confirmed whether this was so, and more specifically which of the two approaches was followed and the implications for the environment. Breakeven price for a barrel of crude oil The auditors stated that they did not have the capability to obtain such information which would have required access to the Contractor’s reserve estimates, production forecasts, and other information which were considered highly confidential. They argued that since the audit was restricted to the period 2018-2020, they could not carry out the type of analysis to determine the breakeven price as this would entail knowing 100 percent of EEPGL costs incurred from the inception date. The auditors referred to an article dated 12 September 2021 at where it was stated that the breakeven point for Liza 1 was US$35 per barrel, compared with the Middle East oilfields where the average breakeven point was around US$27. For Lisa 2, the estimated breakeven point was US$25. See: Exxon’s Big Bet On Guyana Is Starting To Pay Off | By way of comment, considering the current Brent crude price of oil at around US$87 per barrel and with production at 600,000 barrels per day, Exxon’s subsidiaries are making a daily profit of (US$82 – US$35) x 600,000 = US$31.2 million. On the other hand, based on the PSA, Guyana receives a daily royalty of 2% x 600,000 x US$87 = US$1.004 million; and 12.5% x 600,000 x US$87 = US$6.525 million for its share of profits. Royalty is based on production and not profits, and to say that Guyana receives 14.5 percent of profits is incorrect. There have been calls from a wide cross-section of the Guyanese society for the PSA to be renegotiated to ensure that the country get a greater share of the oil revenues, especially as regards royalty. For example, if the royalty were 10 percent, Guyana would have received US$5.220 million daily based on existing production, as opposed to US$1.004 million. There are other issues relating to ring-fencing, taxation, and the percentage allocated for cost oil, among others. Contrary to the views expressed elsewhere, the PSA does allow for renegotiation but with the consent of both parties. Both the Prime Minister of Trinidad and Tobago and his Minister of Energy and Energy Industries are on record of having stated that, after decades of dealing with oil and gas contracts, they have successfully renegotiated almost all of them over the last seven years or so. According to the Prime Minister: We respect the sanctity of contracts, while not accepting that contracts are written in stone. Contracts are engagements made at least between two parties or more and when you make contracts, if there is goodwill between the participants, and if the intention is for both participants to benefit from the nature of the contract, we see that opportunity and the possibility of contracts being revisited so as to maintain that balance of the elements of the contracts and that is the basis on which we have approached the multinationals and we do so out of respect and we do so out of competence. (Demerara Waves, 19 September 2018) Costs relating to migrant workers’ families The auditors stated that the Contractor charged approximately US$10.3 million for transportation services in Guyana. However, the information did not indicate what trips are taken, by whom, and to where. The 2020 costs were approximately US$400,000 per month relating to vehicle rental, payments to drivers, dispatchers, supervisors and the cost of fuel and maintenance. There are approximately 90 vehicles and eight buses used to transport personnel in-country. These costs were allocated between all Guyana blocks, with over 95% of costs allocated to Stabroek Block. As regards tuition fees and other related benefits paid to expatriate staff and affiliated employees, the auditors stated that these are recoverable under Section 3.1(b)(iv) and (v) of Annex C of the PSA. This includes rental of accommodation. Cost of chartered flights and related costs during COVID-19 pandemic This item was dealt with in Appendix A of the report. Flaring fines and associated costs The auditors stated that they did not identify any flaring fines imposed during the period 2018-2020. There was, however, an upset in the flash gas compressor which caused excessive flaring in January 2021. Since the FPSO was leased, the auditors were unable to determine whether the cost of any repair or upgrade was included in the lease payments made by the Contractor and included in the Cost Recovery Statement. Corporate social responsibility The cost of CSR programmes requires the approval of the Minister for it to be considered recoverable, as provided for under Article 3.2 of Annex C of the PSA. However, the auditors did not identify what programmes were approved by the Minister and the related costs involved. Centre for Local Business Development According to the auditors, the Contractor charged approximately US$6.4 million to the Cost Recovery Statement for the Centre for Local Business Development but later reduce this amount by US$2.8 million. Breaches of the Act and the PSA The auditors stated that those types of costs are not recoverable and that any such occurrence would involve legal interpretation of the law and/or PSA. They, however, did not identify any such costs. It is not clear what Act the auditors were referring to. – To be continued –

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